China’s GDP growth rate has long been a focus for many investors. But a closer look suggests that this headline number is not always a reliable barometer of potential opportunities in China’s corporate debt market.
As the display below indicates, there is generally not a strong or intuitive correlation between Chinese growth and Chinese corporate credit spreads. From 2011 to early 2013, these credit spreads continued tightening as the country’s GDP growth slowed—essentially the opposite of what you might expect in a deteriorating growth environment.
In the past two years, strong technical forces and a search for yield have been additional key influences. Another is the evolving mix/drivers of the Chinese economy. Indeed, our team believes that the underlying drivers of growth are more important to our investment decisions than the headline GDP growth number alone.
Consider the Chinese property sector, which represents 33% of the country’s USD corporate debt market. Despite slowing growth and media attention on concerns about a property bubble and restrictive policies, property sales have and continue to be resilient. In fact, Chinese property has been one of the best-performing sectors in Asian corporate debt over the past year...
But even as property sales have been strong, this has not translated into equally robust construction demand as property developers have looked to clear their inventory as well as adopt a more conservative growth strategy.
The implications are mixed for Chinese corporates. On the one hand, a conservative growth strategy has led to an improving credit profile for property developers, but weaker construction demand has contributed to disappointing earnings for other companies reliant on demand for construction materials such as steel and cement.
In analyzing the Chinese market, we make a few additional observations:
- Despite slower GDP headline growth, housing demand has been strong given a high household savings rate, selective policy easing and rising wages.
- High level policy rhetoric does not always translate into uniform implementation across the board. On-the-ground implementation of policies can vary regionally, and has been reactive to local economic and social conditions. For instance, in Beijing and Shanghai, real estate purchase restriction measures are much more tightly enforced than in many other cities due to more speculative demand from non-locals.
- Demand in the Chinese property market can vary across different regions and market segments, and we simply cannot generalize or extrapolate from past trends. For example, in 2010, property sales volume in Shanghai dropped 39% while nationally it grew 10%. Year-to-date through July, sales in Shanghai are up 32% versus 26% nationally.
Taking a broader view, Asian growth is moderating, largely driven by higher global interest rates, weaker investment and commodity demand. More positively, household balance sheets remain strong and the outlook for exports is improving. We see opportunities in sectors that benefit from a developed-market upswing or household demand. But we are more selective on sectors that are leveraged to the capital investment cycle.
In our view, investing in Emerging Markets Debt requires both a solid understanding of the macro economy and an appreciation of the granularity and dynamism of the underlying drivers which contribute to growth. Having individuals on the ground who speak local languages and can observe developments first hand is key in seeking success in this important and growing marketplace.
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